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Start Your Business Startup Basics

Product Liability: Why Your Marketplace Business Needs Coverage

Credit: Casimiro PT/Shutterstock

Many third-party marketplace sellers using sites like Etsy and Amazon don't think to purchase business insurance – especially if their business is a side hobby.

But there are risks to distributing products online. As an independent seller and business owner, you're on the hook for any property damages, customer injuries or sicknesses your product might cause, said Ted Devine, CEO of Insureon. Sellers are often unaware of flaws in design and manufacturing, and not having insurance can cost them a lot of money and even their entire company.

Don't leave your company unprotected – consider investing in insurance. Here's everything you need to know to cover your third-party marketplace business. [Not sure what insurance your small business needs? Check out our guide to assessing your risks.]

Customers can easily collect compensation for any defects or damages your products cause, putting your company at risk for a lawsuit. No matter how careful you think you are when creating and selling your products, you are always liable for any issues that arise, even if the fault was of a manufacturer along the way.

"If you sell products online, it's a good idea to have a commercial general liability (CGL) policy," said Laura Adams, senior insurance analyst at insuranceQuotes.com. "This basic coverage gives small businesses a broad range of protection, including premises and products liability."

According to Adams, there are various product liability coverage options for small businesses. CGL pays for damages and legal costs, but for even more protection, you can purchase a commercial umbrella policy, Adams added.

Additionally, Adams recommends considering a business owner's policy (BOP) to protect your business assets. "A BOP includes coverage for other types of perils, such as loss of income, business interruptions and cyber-theft," she said.

Finally, you may also want to consider a specific product liability insurance policy. For instance, if you're selling kitchen supplies and someone accidentally cuts their finger, they could claim it was due to a defect in the production of the device and bring you to court. Without coverage, you'd likely pay a hefty price. However, with product liability insurance, you can greatly offset the costs of a potential lawsuit.

"A typical product liability insurance policy covers product injury lawsuits, illnesses caused by toxins in products and property damage caused by defective products," said Devine.

Product liability lawsuits have some of the highest payouts. Since you don't have a corporate shield, it's crucial that you take all precautions by listing any warnings for your products and having them insured the entire time they're in use.

"The price of commercial general liability insurance varies depending on the type of business you operate, how many employees you have and the coverage you select," said Adams. "The cost of an average CGL for a solo entrepreneur could range from $400 to $800 per year."

Adams advises weighing your options and comparing costs and benefits across the board. However, "having some amount of insurance is better than nothing," she said, adding that you can increase your coverage or purchase additional types over time.

To cut down on these costs, make sure your safety polices are thorough, outlining any possible risks or dangers, and research multiple insurance carriers to compare prices and benefits.

Insuring your products might cost you now, but it will likely save you money in the long run.

"Though it may seem unnecessary, it definitely is worth it, and a little can go a long way in ensuring the well-being of your online business and your own finances," said Devine.

Sammi Caramela

Sammi Caramela is a recent graduate of Rowan University, where she majored in writing arts and minored in journalism. She currently works as a Purch B2B staff writer while working on her first novel in her free time. Reach her by email, or check out her blog at sammisays.org.